12. Assuming that the CAPM holds, find the expected return of stock X for the period 2001-2004.

A. 12.45%

B. 10.96%

C. 16.80%

D. 14.20%

13. Assuming that the CAPM holds, find the expected return of stock Y for the period 2001-2004.

A. 13.65%

B. 11.22%

C. 9.96%

D. 8.02%

14. Assuming that the CAPM holds, find the expected return of stock Z for the period 2001-2004.

A. 10.94%

B. 13.27%

C. 11.33%

D. 15.42%

15. Assuming that the CAPM holds, find the expected return of a portfolio that invests 20% on stock X, 30% on Y, and 50% on Z.

A. 9.28%

B. 11.01%

C. 12.46%

D. 8.98%

16. Determine whether a portfolio that invests 20% on stock X, 30% on Y, and 50% on Z is overvalued or undervalued? (Hint: find the difference between the portfolio return calculated using the given portfolio weights and the portfolio expected return calculated using CAPM.)

A. overvalued by 8.21%

B. overvalued by 6.56%

C. undervalued by 5.32%

D. undervalued by 4.87%

17. Assuming that the CAPM holds, find the expected return of a portfolio that invests 50% on stock X, 30% on Y, and 20% on Z.

A. 12.74%

B. 13.99%

C. 10.65%

D. 14.59%

18. Determine whether a portfolio that invests 50% on stock X, 30% on Y, and 20% on Z is overvalued or undervalued? (Hint: find the difference between the portfolio return calculated using the given portfolio weights and the portfolio expected return calculated using CAPM.)

A. undervalued by 4.87%

B. overvalued by 8.21%

C. undervalued by 5.32%

D. overvalued by 8.12%

Questions 12 to 18 below use information from Questions 7 to 11,and are also based on the Capital Asset Pricing Model (CAPM), which is closely related to the market model we covered in class. Specifically, given below the market model, StockExcessReturnrirf=i+Systematiccomponenti(rmrf)+Firm-specificComponenti Take expectation on both sides, you get the equation below since the intercept and beta are constants, E(RiRf)=i+i[E(RM)rf]+E(i) Note that we assumed the firm-specific variance is zero in class: E(i)=0. In addition, CAPM assumes that the model correctly prices all assets so that alpha is equal to zero if CAPM holds (e.g., in the model). Plug in E(i)=0 and i=0, we get the final equation for CAPM below: E(Ri)=Rf+i[E(RM)rf] where E(Ri) is the expected return on asset i,Rf is the risk-free rate, i is the same beta from the market model, and E(RM) is the expected market return. date200120022003StockX0.100.150.35StockY0.250.150.10StockZ0.350.250.20Market0.070.050.20Risk-Free0.050.050.05 20040.150.400.100.100.05